AIG Bonuses are a (green) Herring

This week, hordes of Americans wore green and got wasted. Just like St. Patrick’s Day is a good excuse to get hammered at lunch time, as the Royal Exchange bar near my work was a testament to Tuesday, the $165 million in bonuses doled out to AIG employees this weekend is an excuse for a media blitz to galvanize populist sentiment. Both of these blitzes will likely leave the public with hangovers.

President Obama was right calling the bonuses, to paraphrase, ‘insulting to our common sense and values’. His voice rang loudest in a chorus of Politicians calling for the heads (or the intestinal bowls, in the case of Senator Grasley) of AIG and demanding a list of the bonus recipients in order to ostensibly lambaste and publicly ridicule them. Yesterday Barney Frank,Chairmen of the House Financial Services Committee, demanded from AIG CEO Edward Liddy said list, or threatened a subpoena. Manhattan Attorney General Andrew Cuomo has already started an investigation into the matter. While Liddy, who was appointed by former Treasury Sec. Hank Paulson (along with some Goldman Sachs/Geithner advice) last year to lead the ailing business has reportedly asked for those receiving more than $100,000 to give back the money, this will little assuage the bloodletting that politicians are calling for.

Indeed, along with House Democratic leadership, Congressman Steve Israel called the bonuses “… a mugging on Wall Street. And when you get mugged you want two things to happen. You want justice, and you want your money back.” So what is Congress’ plan? Tax the bonuses, as soon as possible. Congress really gets moving when the populist crowd is frothing. Meanwhile, Secretary of Treasury Tim Geithner offers an executive solution to the problem: to take out $165 million from the upcomming $30 billion that Treasury plans to support AIG with, increasing Federal shareholder value to over 80% of AIG ownership. Taking back $165 out of $30 billion is still a drop in the bucket. It’s like taking a drop of alcohol away from the drunkard who’s grabbing for the whole bottle. This is neither justice, nor will it get our money back.

What is really needed is a more permanent solution that puts greedy drunkards of the public money into rehabilitation and creates huge incentives to move us away from the riskiest moral hazards. This kind of talk may leave many running to do the toilet seat prayer: but unless we sober up to the reality that unfettered greed, political showmaking and bandage solutions will get us no-where, we’ll continue to find any excuse we can to binge on toxicity in the name of green.